IRS Reports 40% Surge In People Underpaying Their Tax Bills

Paying taxes is just about as much fun as a root canal. As such, apparently more and more people are just deciding not to do it. As the Wall Street Journal points out today, the IRS saw a 40% surge in returns that owe tax penalties between 2010 and 2015.

For reasons that aren’t clear, a growing number of people who pay taxes quarterly are getting their payments wrong and incurring penalties as a result. These taxpayers often owe estimated taxes because they have income that’s not subject to the same withholding as wages earned by employees.

According to Internal Revenue Service data, the number of filers penalized for underpaying estimated taxes rose nearly 40% between 2010 and 2015—to 10 million from 7.2 million.

In 2015, the total number of filers owing penalties may have exceeded the number filing estimated taxes, although final results aren’t out yet. This is possible because some who paid quarterly taxes may have made mistakes, and others who didn’t pay them should have.

“The data suggest that millions of people don’t understand they need to pay quarterly taxes, or at least increase their withholding to avoid penalties,” says Eric Smith, an IRS spokesman.

Estimated tax payments are Congress’s way of keeping non-wage earners from having an advantage over wage earners. More than 80% of taxpayers have wages that are typically subject to withholding, and most people pay most of their income tax this way. Thus the law requires people with other types of income to make quarterly payments based on amounts received during each period.

Taxpayers with a mixture of wage and non-wage income must either pay tax quarterly or raise their withholding to cover the non-wage income. If total payments don’t meet certain thresholds, then the taxpayer owes a penalty on the underpayment based on interest rates charged by the IRS. Currently the rate is 4%.

Of course, there's any number of reasons why people may be underpaying their tax bills. Some people, you know...those who count themselves among the 95 million 'discouraged' workers who have left the work force completely, have been forced to take on random contract work to make ends meet and simply don't understand that they have to make quarterly estimated tax payments.

That said, others understand the tax system perfectly well and are all too happy to take a 4% loan from the federal government courtesy of the Janet Yellen's accommodative interest rate policies.

Tax preparers suspect several factors are at work. For most of the period penalties grew, the interest rate was 3%—the lowest in decades, making the pain of paying them lower as well.

“Some people don’t mind paying the toll, especially if their income bunches in the last quarter, and they just owe it for a few months,” says Don Williamson, noting the decision also could explain why average penalties have declined. Mr. Williamson is a certified public accountant who heads the Kogod Tax Policy Center at American University and has a private practice.

To that end, and while unclear if it's true, Floyd Mayweather’s tax attorney, Jeffrey Morse, recently said that he was simply taking advantage of Yellen's low rates by 'deferring' his $22 million tax bill from 2015. Of course, we suspect this could be just a clever way to avoid fessing up to blowing through nearly $1 billion in career prize winnings...because that would just be embarrassing.

"If he is investing money and getting a rate of return that far exceeds what he has to pay the IRS in interest, then any smart business person is going to take advantage of that deferral."

Then again, maybe it's all much more simple and people aren't paying their taxes because they need the money to fund that $500 monthly BMW lease payment they could never afford but finance companies were all too willing to underwrite...just a thought.

Hell's Bells, if the president can decide which portions of a law he will enforce, if Jeff Sessions can go along with more civil asset forefiture (stealing from private citizens by law enforcement personnel), and if the cops themselves can break the law without consequence why should anyone pay taxes?

Warren Buffet has been fighting paying "his fair share of taxes" through a legal battle in the courts for years.

And it comes down on small business and independent contractors. Hey geniuses, small business isn't paying because it's getting starved out. Compliance is one word describing how only corporate structures can bear the costs of compliance.

IRS doesn't give a shit if mom & pop go out of business. They will get their taxes from McFartMart just the same. Politicians still see the public as an ATM.

Pretty soon you are gonna pull up to the pump and put one hose in your tank and the other in your mouth and top 'em off for the day. And your paycheck will get credited to your McFartMart chip. Which is gonna be shoved so far up your ass it won't never come out.

Well .... they could just start arresting people and seizing their assets. Just a couple hundred a day, say? Any hint of radical antigovernment sentiment and they add some flash-bang, swot and shoot first to their immensely reasonable property ceasing patriotic neck-pressing boots.

Agreed, but this story is not about that, though it tries to be. The give away is the accountant's line that the average penalty has dropped (even though the penalty interest rate has risen from 3 to 4%). That says these are small estimating misses that incurred nominal 20 or 30 dollar penalties. Interesting the article doesn't supply the data on penalties themselves other than raw growth rates. Let's see the trend in average penalties assessed.

3 years ago my wife and I after paying in all year had to pay another 10k in. I told our accountant/tax preparer that she might want to find another job. She asked why?

I said the day is coming that people will stop filing their taxes because they'll be confronted with paying taxes or feeding their families.

After about 7-10 seconds of that statement she looked at me and said, "I don't think you're kidding and I think you may be right"!

This is what I told her, people will start underpaying and next just stop filing completely.

It's the end of the show people. They've driven people into the ground and won't stop until they keep pounding us below the surface. There's no president or congressmen or senators or sumpreme court judges who can save this catostrophe we're living/dying through.

A couple of years ago I had a one-on-one meeting wth my congressman. One of the things we talked about was tax withholding. I'm self employed and I suggested that employers should not be tax collectors, but that everyone who was an employee should not have withholding but have to file and pay a quarterly like me so that they would see how much they are actually paying instead of just getting their "take home check". He was honest and said if we did that then nobody would pay.

He's right as most people have a Scarlet O'Hara attitude and put everything off until tomorrow and would spend their tax money. I think we're seeing people changing their entire attitude towards this insanity and we're so close to people just stopping all together on filing. When a country and especially of this country's obligations because of the military to pensions and SS to Medicare etc.... we're truly in the death throes now. It's over

Last time I "earned"anything was 06, Some asshole reported $700.00, they still want $50.00! Even though I receive $735.00/ mo from (((them))) ( LIVING LARGE ) FFS! Last year I setteled a 20K lien issue for $523.00 bitchez. Been not self employed since 98/99!

I do not "work", I do favors for friends and neighbors, and they give me "gifts". I accept gold, silver, FRNs, guns and ammo. Never checks, and I'll tell ya where you can swipe that card!

I do believe it is starved thus why the government is caring about the under payments it's experiencing. The FED printing and "mystery buyers" have been identified and exposed and the whole world is aware very soon actual toilet paper will be worth more.

-->IRS is an on-line, authority hungry, troll, run by Tyler Durden's Space Monkeys for Project Mayhem

I am not a quarterly filer, they withhold from me. 2016 tax year, something like this happened to me, too. I did it all correctly and they told me I had not. They had even withdrawn the funds and I could prove it. They kept sending me notices. I was really panicked. I hope it is done with now. As it went on and on, I too flipped out on how Kafkaesque it all felt. No one could tell me why this was happening to me and penalties were being added to the total.

It's interesting because up to 50k-ish, a mid-sized family has zero fed obligation: what this shows, maybe, is that the lower middle class (~150k) is starting to feel the pinch. Socialism's shit cesspool is rising, perhaps?

I know that stockman's work (and its derivatives like supply side / trickle down) isn't broadly loved here, but the prog flip-side:"screw the weak" does appear to be a rising fecal lake. Maybe a new tier of Americans will notice the smell of it and begin to think if maybe unlimited h1's (and the rest of the destroy America playbook zh-ers all know) aren't just maybe a Teensy bit fucking traitorous evil.

If you're self-employed, you owe 15.3% in payroll tax (Social Security, Medicare, etc.) regardless of income. That's whether or not you owe any Federal Income Tax. The story that half of America doesn't pay taxes has always been bullshit. Until you're making close to $100k (if you have a family), you pay more in payroll tax than you do in Income Tax.

The key is that having Schedule C (self-employment) income allows one to deduct a lot of expenses that are much more difficult, if not impossible, for W2 employees to claim.

Even with the 15.3%, I pay less in Federal and State income taxes now than I did as an employee, adjusted for the fact that I make over twice as much money. And I am very cautious about taking deductions. I don't take the Home Office deduction even though I could, because it's not that much money and it is a red flag, and I don't have an actual room with a door that closes that I use exclusively as an office.

I've seen plenty of my peers get hammered for screwing up their quarterlies. Usually the State tax department acts first and does the groundwork the IRS then uses to mop up. When I get a check for a project, I put 33% of it into my business savings account, and generally only pay out about 25% for taxes, so after living on the initial 67%, when I settle up I have a little 7% savings fund.

If I ever get audited I'll be getting money back.

I'm fortunate. I have very little business overhead. My business is basically myself, a laptop and a cell phone. No inventory, no employees, very few sunk costs. Most businesses have a lot more expenses than I do, so it's easier for me to deal with the quarterlies than most small businessmen. Also, after my first year in business almost 15 years ago, I hired a tax accountant rather than use TurboTimmy or similar. With 14+ years of data, we've gotten very good at forecasting. A lot of people I know are idiots about dealing with taxes and believe bullshit from the internet and gossip rather than using a professional. I agree the system is stupid and overcomplex and fundamentally not fair, but to deal with it without a professional is suicide.

This story seems incomplete. Without knowing how many Schedule C returns are filed, it's hard to tell if the jump from 7.2m returns with penalties to 10m is that significant, especially since the years in question are 2010 to 2015. Returns filed in 2010 were for 2009 taxes, and 2009 was the shittiest year to be in business for one's self that I've ever seen.

I like Barnhardt and respect the way she told .gov to GFY but remember, she's a widely-read blogger who can "shake the can" (her words) for donations any time she needs a few hundred bucks. Me? Not so much.